First Horizon Corp (FHN) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation second-quarter 2010 earnings conference call.

At this time all participants are in a listen only mode.

Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator instructions).

As reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Aarti Bowman with Investor Relations.

Thank you, operator.

Please note that our press release and financial supplement as well as the slide presentation we'll use this morning are posted on the Investor Relations section of our website at www.FHNC.com.

Before we begin, we need to inform you that this conference call contains forward-looking statements which may include guidance involving significant risks and uncertainties.

A number of factors could cause actual results to differ materially from those in forward-looking information.

Those factors are outlined in the recent earnings press release, and more details are provided in the most current 10-Q and 10-K.

First Horizon National Corporation disclaims any obligation to update any forward-looking statements that are made from time to time to reflect future events or developments.

In addition, non-GAAP financial information may be noted in this conference call.

A reconciliation of that non-GAAP information to comparable GAAP information will be provided as needed in a footnote or appendix of the slide presentation available in the Investor Relations area of our website.

Listeners are encouraged to review any such reconciliations after this call.

Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan; our CFO, BJ Losch; and our Chief Credit Officer, Greg Jardine.

With that, I will turn it over to Bryan.

Good morning and thanks for joining the call.

Second quarter's results demonstrate that the successful execution of our strategic plan is paying off.

Our proactive approach to credit quality, aggressive de-risking efforts and the re-focus on core businesses have resulted on First Horizon's first bottom-line profit since the first quarter of 2008.

Income from continuing operations was $20 million, a significant turnaround both year over year and linked quarter.

Improved credit quality was a major driver.

Linked quarter, provision expense decreased to $70 million, charge-offs were down 27% and NPAs declined 14%.

We also benefited from our re-focus on the Regional Banking and Capital Markets businesses, as both showed good performance in the second quarter.

FTN Financial remains a high return on capital business for us.

Average daily revenue declined towards normalized levels but is still solid.

Regional bank profitability was sharply improved due to lower credit costs and higher revenue.

The Regional Bank continues to demonstrate customer deposit growth, improved fee revenue and strengthening net interest margin.

Loan demand remains soft, but we've seen signs of increased borrowing activity in our corporate lending line of business and from mortgage warehouse lending.

Additionally, the loan pipeline is improving.

We're proud of the profitability we achieved this quarter but mindful that the economic and operating environment will remain tough near-term.

We believe that the economy will continue to recover but at a gradual pace.

High unemployment and a weak housing market are likely to remain, restraining organic growth prospects and keeping environmental costs elevated.

Against a backdrop of likely low single-digit economic growth, we expect interest rates to remain low for an extended period, and we also expect loan growth to be low overall but benefiting from our customer acquisition efforts.

And, while we support financial regulatory reform, the legislation is expected to pressure industry revenue and elevate expenses.

There are still a lot of unknowns, but we are already taking steps to mitigate revenue losses.

The new rules are not expected to adversely affect our capital markets business.

The elimination of trust preferred securities as a source of Tier 1 capital should not materially affect our capital position.

Our TruPS account for only $300 million of Tier 1 capital or 144 basis points of our strong Tier 1 ratio of 16.8%.

Although a slow economy and regulatory reform provide uncertainty and challenges, they also provide opportunities, opportunities that we are fully prepared to take advantage of.

We have the team, the product capability, the systems and the capital.

We have made significant progress in reducing our balance sheet risk and cleaning up problem loans.

We've made headway in lowering operating costs and improving efficiency.

Near-term, modest organic growth, credit cost reduction and efficiency improvements will likely drive our bottom-line improvement.

I'm confident in our ability to take market share as revenue growth opportunities surface.

BJ will now take you through the financial results for the quarter, and I'll be back as we take your questions.

Good morning, everybody.

Starting on slide five, to give you an idea of our consolidated earnings view, second-quarter net income available to common shareholders was $3 million for an EPS of $0.01, an improvement from first quarter's loss of about $0.12 a share.

Our pretax net income was $18 million.

Second quarter's results were driven by improvement in credit quality and better hedging results, partially offset by continued elevated mortgage repurchase expense.

If you turn to slide six, our core businesses -- again, Regional Banking, Capital Markets and our Corporate segment -- had a combined pretax income of $52 million in the second quarter, up from $39 million in the first.

Consolidated pretax income again was $18 million.

Looking at the Regional Bank, we had pretax income of $29 million compared to last quarter's loss of $5 million, reflecting a nearly 50% decrease in the Regional Bank's provision to $28 million in the second quarter.

This decrease in provision was driven by stabilizing trends in the bank's core C&I portfolio.

Pretax pre-provision income increased $10 million linked quarter to $57 million.

Revenues were up 4% from last quarter, benefiting from higher net interest income and a seasonal rebound in NSF/OD fees.

At the same time, non-interest expenses declined about 1%.

Our bankers focus on superior customer service and calling efforts paid off as average core deposits were up 3%.

Loan demand continues to be muted, and average loans in the regional bank were down about 1% for the quarter.

On the capital markets side, we had another good quarter as pretax income was $28 million.

Fixed income revenues continued to normalize, declining 13% linked quarter.

Our average daily revenue was down from $1.7 million in the first quarter to $1.5 million in the second quarter.

Expenses declined 7%, mostly related to those lower revenues.

In our Corporate segment, we had pretax loss this quarter of $5 million compared to last quarter's pretax income of $11 million.

As you will remember, we had a debt repurchase gain of $17 million in the first quarter.

Our Corporate NII dropped $4 million due to a decline in yield and the size of the securities portfolio, combined with the changing consolidated balance sheet mix.

Our nonstrategic segment posted a 41% increase in revenues from last quarter, reflecting positive mortgage hedging results of $44 million, primarily due to rate movements favorably affecting fair value of the MSR hedges.

At the end of the second quarter, our servicing portfolio was down to about $32 billion.

We believe that this is a manageable size for us, and the associated cash flow stream that it provides will give us somewhat of an offset to the mortgage repurchase expenses.

If you move to slide 7 quickly, our consolidated expenses were flat linked quarter at about $342 million.

While we continue to focus on efficiency efforts, we are still facing significant headwinds from environmental costs in our nonstrategic segment, driven by mortgage repurchase.

So if you move to slide 8, I'll get into details a little bit more on the mortgage repurchase reserve.

After flattening in the fourth quarter to the first quarter, our new requests again increased in the second, while resolutions remained flat, causing our aggregate pipeline to increase to $411 million.

In the second quarter, we built the reserve to $162 million and had a mortgage repurchase provision expense of $56 million, a $15 million increase from 1Q '10, and back to levels we saw in the fourth quarter.

Charge-offs remained stable at $20 million, with our rescission rates and loss severities remaining steady to prior quarters as well.

Notifications of rescissions of coverage from mortgage insurers continue to increase and could present additional uncertainty in the volatility of our mortgage repurchase expenses.

Moving to slide 9, looking at the margin, our consolidated net interest margin remained flat at 3.19%.

The margin was negatively impacted from carrying excess balances at the Fed this quarter, and the nonstrategic portfolio also continues to be a drag on overall margin.

On the bright side, the regional bank's net interest margin was up 14 basis points linked quarter to 5.10%, due to improved loan pricing and a lessening impact of non-accruals in our Regional Bank.

In this low interest rate environment, we do expect the margin to remain somewhat stable for the remainder of this year, absent interest rate increases.

In summary, we are certainly not declaring victory, as the nonstrategic businesses continue to create near-term volatility, and we have a long road to go to meet our [bonefish] targets for returns and profitability.

But with that said, we are pleased with second quarter's progress and will continue to work diligently to sustain and improve profitability.

As Bryan said, any near-term profit gains are likely to be driven by our efforts to reduce credit-related costs and expenses.

And, at the same time, we will continue to work to make sure that we are fully prepared to take advantage of profitable lending and other revenue growth opportunities.

Now I will turn the call over to Greg to discuss second quarter's improved credit results.

Thanks, BJ, and good morning, all.

I'll start with slide 11.

The second quarter showed good credit metrics.

Net charge-offs were $133 million, down 27% linked quarter and down 45% year over year.

Our net charge-off ratio improved 103 basis points from last quarter.

Charge-offs were lower from reduced balances in our nonstrategic construction portfolios and stabilizing trends in our core C&I portfolio.

Reserves decreased $63 million, driven by reserve releases in our national res CRE, one-time close, Permanent Mortgage and consumer portfolios -- are early actions of identifying problem loans to get ahead of the curve with credit issues.

Moving on to slide 12, as Bryan mentioned earlier, nonperforming assets declined 14% from last quarter and were down 27% from a year ago.

This is the fifth consecutive quarter of NPA decline.

Second-quarter decrease was primarily driven by less inflow of nonperformers and fewer downgrades.

Overall, nonperforming trends improved in the second quarter, but going forward, the quarter-to-quarter statistics could show some volatility from inherent lumpiness in our commercial portfolios.

Our ending balance of ORE was slightly down as well in the second quarter.

We will continue to have better success in asset disposition with individual transactions.

We did have a small bulk sale this quarter.

We will continue to evaluate opportunities to dispose of our nonstrategic assets as it makes financial sense.

Now I'll go through our portfolios in detail, starting with income CRE on slide 13.

Our income CRE balances were $1.6 billion at second quarter, or about 9% of our total loan portfolio.

Charge-offs were $12 million, down $6 million from first quarter.

We have approximately one-third of our income CRE portfolio maturing over the next 18 months.

Weakening getting market conditions could potentially impact performance.

However, stress performance could be minimized by strong sponsors and cash flows.

Our reserve levels have been at 8% or higher for four quarters in this portfolio, and reserve coverage is currently 9%.

I'll discuss our C&I portfolio on slide 14.

In the second quarter, C&I had balances of $7 billion.

Nearly three-fourths of these balances comprise our core C&I portfolio of general commercial loans.

TruPS, bank-related and mortgage warehouse lending make up the remainder.

Charge-offs in the C&I portfolio were $20 million, down $8 million from first-quarter levels.

As I mentioned earlier, we are seeing some stability in the core part of our C&I portfolio.

Slide 15 gives some detail on the TruPS and bank-related loan exposures.

We have $465 million in TruPS and $137 million in bank holding company loans.

We have eight TruPS on interest deferral and one TruP elected deferral in second quarter.

The average size of a TruP is $9 million.

Although we did not experience any charge-offs in the TruP book this quarter, we do not expect this trend to continue.

We will continue to monitor this portfolio carefully, as it will likely show volatility and will maintain a healthy reserve.

On slide 16, you will see that our home portfolio or our home equity portfolio trends remain stable.

Second-quarter's charge-offs declined $5 million linked quarter to $40 million.

Delinquencies were fairly stable in both our regional bank and nonstrategic portfolios.

We decreased reserves by about $11 million in the home equity portfolio.

This was the second consecutive quarter that we released reserves in the home equity portfolios.

This quarter's reserve decrease was from a combination of lower balances, continued lower entry roll rates, lower total delinquencies and relatively flat charge-off rates.

The borrower characteristics of this book remain strong.

86% of the loans were retail originated.

The average [refresh] FICO is 726, and we ceased national originations in early 2008, limiting the loss content by vintage.

We expect continued stable trends in the home equity portfolio, assuming ongoing economic recovery, as consumer delinquency and loss rates are highly correlated with unemployment rates.

Now moving to slide 17, it shows an update on our nonstrategic portfolios.

The national residential CRE book was down 34% from first quarter to $177 million in second quarter.

As expected, we had a $4 million reserve release 2Q 2010.

Permanent Mortgage balances declined 5% linked quarter to $1 billion.

Charge-offs declined 46% to $15 million linked quarter.

Recall, in the first quarter, much of Perm Mortgage losses were related to an acceleration of net charge-off recognition of loans in process of foreclosure.

Reserves were 7% of loans.

We expect flat to improving trends in this portfolio.

As we have largely eliminated the one-time closed portfolio, few of the remaining loans are likely to modify into the Perm Mortgage portfolio.

On slide 18, credit quality in the second quarter was as expected.

We saw positive metrics with lower provision expense, a decline in charge-offs and nonperforming assets and a reserve decrease.

Over the long-term, charge-off and reserve levels should continue to decline as we complete the wind-down of our construction portfolios, home equity and C&I should also continue their steady trends.

Although we may see some quarter-to-quarter volatility with credit trends in the commercial portfolios.

Finally, I would like to say I'm excited in my new role as a Chief Credit Officer.

I look forward to getting to know our investors, analysts and other members of our investment community.

I'll turn it over to Bryan.

I feel good about how and where we are positioned for growth when the economy improves.

Economic uncertainty can create opportunities, and we plan to take advantage of these opportunities.

We are focused on hiring additional talent, improving processes, upgrading technology and providing great customer service.

Thanks to the hard work of our employees, we are executing on our strategy to achieve our goal of attractive long-term returns for our shareholders.

Operator, we will now take questions, please.

(Operator Instructions).

Bob Patten with Morgan Keegan.

Welcome back to the land of profitability.

Two questions, Bryan, BJ, it really revolves around mortgage repurchase.

Is there any additional color you can give us in terms of how you guys are analyzing the flow, the light at the end of the tunnel?

What are the drivers here?

We are seeing an increase in the pipeline growth.

So that's one question.

And the other question is just around the size of the balance sheet earning assets.

We see cash building up; in the supplement, you see the loan pipeline slowing down in terms of the runoff.

Home equity -- I think is a misnomer out there by the market.

Can you give us some color on those two items?

Hey, Bob, it's BJ.

I'll start with mortgage repurchase.

Obviously, we had seen a flattening from 4Q to 1Q in new requests, and then there was a pretty material increase in requests in the second quarter.

At the same time, our resolutions have stayed roughly flat.

So most of our repurchase provisioning and reserve is related to what the aggregate size of the pipeline is.

We know that we've got to get through these portfolios and get some more resolution.

So we expect to see more resolutions, which will then lead to more charge-offs and, at some point, a flattening of the reserve.

Now, I think it's important to keep in mind that this is obviously still an issue for us and the industry.

But we ceased originations in August of 2008.

So there's going to be a finite point at which our volumes start to slow.

And so we are watching this very closely.

We feel like we are well reserved, and we will always be as proactive as we can on getting through it as quickly as we can.

On your second piece, the cash buildup, I think what we had was, in the second quarter, a significant dollar balance of excess reserves at the Fed.

I think with the volatility in the markets, particularly of what was going on in Europe and so on, we didn't see a great entry point to buy anything into our investment securities portfolio.

We will look for ways to put a little bit of money to work there, particularly if we still see loan growth being muted.

We would obviously rather put it to work for customers, but we are going to try to do a little bit of both going into the second half of the year.

The third piece, I think, was the level of earning assets, which stayed roughly flat at $26 billion.

And what I think we've all said before is that we do think that it flattens out anywhere between $25 billion and $26 billion for our Company.

As the national strategics wind off, we do think that, over the next couple of quarters, we could see some modest growth in the regional bank that could partially or wholly offset that.

So we feel like we're bottoming out around this number.

Bob, this is Bryan.

I'll add to BJ's comment.

I've got a lot of confidence in our ability to put earning assets on the balance sheet at the appropriate time.

As I mentioned in the prepared comments, we are starting to see some pickup in loan demand.

I feel good about the pipelines for new or incremental credit that we are seeing today.

I think we are seeing a lot of very positive signs in customer activity and in customer acquisition.

But I'd say loan demand, on the whole, is still reasonably low.

It is not all that strong.

And I would also add that the market is becoming a little bit more competitive in terms of the loan demand that's out there, particularly on the C&I side.

So I'm pretty confident in our ability to grow earning assets.

There will be plenty of opportunities.

I mentioned that a couple of times in the prepared remarks.

I think there are going to be a lot of opportunities that come out of all the changes going on from financial regulatory reform, coupled with a lower growth, low interest rate environment.

They are going to be tough to find, but we are going to look for them and we are going to put capital to work.

And then, to reemphasize BJ's point, the real rapid decline in our national portfolios is behind us.

The construction portfolios, which, 2.5 years ago, totaled over $4 billion, today total something in the neighborhood of $250 million.

The Home Equity portfolio is running off but at a very slow rate, and, as Greg said, performing well.

So I think, is BJ said, we will see our balance sheet bottoming somewhere in this $26 billion, $25 billion range.

Thanks, Bryan; thanks, BJ.

Sure thing.

Craig Siegenthaler, Credit Suisse.

Just looking at some of the indicators of future credit quality trends, they really, I thought, all looked pretty good with delinquencies really showing improvement in a lot of places, inflows, non-accruals down a lot.

My question was on income CRE, however, which showed some early signs of improvement, but your guidance on the charge-off side is still pretty conservative, especially for the back half of this year.

I'm just wondering if you could help us reconcile this and maybe talk about what you're seeing on the income CRE side.

Sure; Craig, this is Greg Jardine.

I think there is a couple things to look at.

One is just overall what's going on in that particular industry, and we are beginning and well into maturity cycles not just within our portfolio, but within portfolios in the CMBS market and other banks as well.

So with that, in the different types of properties that we have, would expect to see some continued pressure there.

60% of our book was originated in '05 through '07.

Those were more peak years in terms of what's happening with cap rates in the market right now.

So that's why the expectation is that it will be nothing like the res CRE, but it will be a disturbed portfolio.

We've got -- we believe that we are mitigated in many ways, but we do believe that there will be some pressure within that, depending -- hospitality is one right now where we have no NPLs.

And I would expect we might see NPLs within that particular part of our portfolio, as an example.

And this is really driven by, I guess, refinancing and not default; is that right?

Because you add five years on 2005, and you are virtually where we are now.

So that's (multiple speakers).

It's really similar to the financing side of this, right?

That's correct.

It's the refinance side of it, and frankly, we have not used A B note structures before, and there may be the beginning of some A B type note structures as we go into some of those renewals, which, of course, would potentially put more pressure on charge-offs as opposed to reserves.

Brian Foran with Goldman Sachs.

On the rep and warranty -- and I apologize if I missed it -- have you given a breakdown of requests between GSEs and mortgage insurers?

And if you haven't, can you talk to the issue?

Is the mix changing at all, or is it fairly steady?

All of the actual requests come from the -- well, most -- the vast majority come from GSEs.

Few of the requests come from privates, but the vast majority from GSEs.

The MI's don't actually make a direct request to us.

They indicate their intent to drop MI coverage, and then the GSEs at that point can make a request back to us on a repurchase.

So that's why we watch MI rescissions very closely, because they are a leading indicator of potential requests back to us through the GSEs.

Right now, in our pipeline, we would estimate something, I believe, in the range of 40% to 45% of the pipeline is related to MI rescissions.

And then on the comments, Bryan, you made on C&I, I guess the question is, one, on the growth side, is it more new customer demand or is it more existing customers starting to draw down on their lines?

And then, secondly, when you say pricing is becoming more competitive, can you give us a sense maybe where it was six months ago or where it is now in terms of typical yields or spreads you are earning?

We are seeing -- talk about the demand first.

We are seeing a little more demand in the large corporate side.

And the pipelines are building in a number of different areas, everything from large corporate and commercial real estate to some of the -- actually, in some of the areas of the consumer portfolio.

We are seeing a good mixture of new customers and a mixture of increased borrowings from existing customers.

And the pipeline reports that I was looking at earlier this week was just incremental demand from existing customers or new customers.

And they appeared to be building very, very nicely.

I talked a little bit about pricing and structure.

We are starting to see spreads tighten a little bit, particularly in the C&I space.

That's really a function of, I think, lower loan demand and everybody looking for good opportunities in a market with low loan demand.

I commented on structure.

We're starting to see some degradation or movement towards later-cycle types of structures in the C&I portfolio.

That's not so much the larger banks; it tends to come from the smaller competitors in the marketplace.

So, as a general observation, C&I, in particular, pricing and structure, has come under a little bit of pressure here in the last call it 2.5 -- two, 2.5 months.

Greg, I don't know if you want to add to that?

I agree with that, Bryan.

Just overall, I'd say that what we see in terms of in different segments, the Corporate segment has a little bit more demand than the Commercial segment right now.

And then business banking kind of follows that.

And there's actually some strategic opportunities in CRE, with very well-structured loans, a lot of equity, good structures.

So we're not -- there are some opportunities there.

Steven Alexopoulos from JPMorgan.

Bryan, from the current level of provision, should we expect to see continued declines for the rest of the year?

Or, given your macro comments, are we reaching a point where you could see up and down volatility from here?

I'll look to Greg to back me up on this.

It's hard to pin the tail on what quarter-to-quarter provisions are likely to be.

I still expect that provision levels will trend down over the course of the year and into next year.

There may be some volatility around it, but I don't expect it as I sit here today.

Yes; and you know, my prepared remarks I would say over the long term we would see it go down, but because -- it could bounce from one quarter to another.

But, overall, the trends are definitely going down.

Okay.

And I just had one other question.

BJ, in your response to Bob's earlier question on the repurchase provision, you said at some point you reach a finite point where, I guess, that will drop off quite a bit.

What's the lag time here?

How long until we reach that point?

Your guess is as good as mine.

I think my point was, since we stopped originating in August of '08, we are not adding any more loans that could then ultimately be repurchased or requested of us years later.

And so we haven't originated a loan in over two years, almost, or just under two years.

So I guess my point was that we see 60% of the requests today in the '07 vintage.

And so we think at some point that's going to stop for us and we are going to have to continue to work through the resolutions, and we are going to be past this.

I don't know when that is, but hopefully we get there sooner rather than later.

I'll add that this is an area that the industry, and we, in particular, don't have a lot of history with.

This is really a first time through a lot of this for most of the industry.

And one of the -- this is a little bit, maybe, blind intuition inappropriately; but if you think about what has happened since August of 2008, in particular, because that's when we cut off origination in that business, you've gone through a 30-year high in unemployment; you've gone through a historic drop in real estate prices.

And one of the things that we believe is that, with those external market dynamics, if there are problems or fraudulent loans in the portfolio, they are going to default and come to the surface reasonably fast.

So we think that it will build as it has, and at some point it will turn and start to drop off, just based on those dynamics.

But again, this is an area where there are not a lot of good historical things to look at, and so we are working our way through it, trying to gather as much information as we possibly can.

And, as BJ pointed out in his prepared comments, trying to build adequate and conservative reserves for what we think the risk in repurchases and the loss in the pipeline is.

Ken Zerbe with Morgan Stanley.

Can you just talk a little bit about the NPA sales?

I know you mentioned you had the small bulk sale, but I obviously want to do it on an individual basis, if you can, so presumably due to better pricing.

But is the market for bulk sales coming back?

And what is your outlook there?

Are we going to reach a point where risk tolerance is actually sufficient such that you expect the bulk sale market to open up, and, hence, NPA balances to fall a little more substantially?

Or is this a slow grind as you just keep working through it on an individual basis?

Yes, this is Greg.

I will take a shot at that.

I would not say that the bulk sale market has opened up.

This was a very small one, and it just happened to work.

We still see much better execution with single transaction than bulk sale.

I would say, if anything, if it had been totally frozen from, at least, our observations of what the economics look like, it might have a couple of drips off of the ice.

So it's still frozen, but it's beginning to maybe thaw just a hair.

I don't see that market, at least near term, becoming exceptionally good.

So I think we will just continue to grind away, at least from what I can see at this point in time.

Okay.

And then the other question I had was just on your MSR portfolio.

Just remind us of your plans here.

Obviously, you brought it down to, what was it, $32 billion.

But you made a comment [they] actually want to use this as an offset against the mortgage repurchase expenses.

Have we reached a stable point with the MSR portfolio that you are not going to be pursuing sales from here?

Ken, this is Bryan.

We have clearly brought it down significantly, and that has been part of what we've done over the last couple years.

It was over $100 billion when we exited the mortgage business.

And today, as you said, it's about $30 billion.

We think, with the valuation that we've placed on it, or the fair values that are placed on the portfolio that we have, the $30 billion, the characteristics of it, the performance characteristics, we think that at these levels, there are pretty attractive returns on it, in terms of an earning asset.

And we might still have some smaller sales, but we are not going to be all that aggressive, if very aggressive at all, in looking for opportunities to sell it.

It does provide some offset to some of the costs in the mortgage business, and it is an attractively valued earning asset at this point.

It will be an attrition state.

It will wind down over time.

We're not adding to it, but we are not going to be proactively trying to sell it as aggressively.

Kevin Fitzsimmons from Sandler O'Neill.

Just a few questions.

One, if you could give a little color on the temporary increase in the trading loans?

You mentioned, I think, in the release that these are expected to be sold in third quarter.

If you could just give a little color on that?

And I apologize if you already touched on it.

And then, Bryan, just if you could expound on -- you seem pretty convinced that there are going to be opportunities.

If you can give a little color on is that just near-term taking market share?

And how do you feel about the subject of acquisitions?

I know we've always talked in prior quarters about FDIC deals.

But now we've seen a few live bank deals start to occur.

What's your opinion on the timing of when attractive ones are going to come up on that?

Hey, Kevin, it's BJ.

I'll talk to the trading assets first.

In our capital markets business we have a group called capital assets that does loan sale [solicitations] and work across the industry.

And so they had a couple transactions that happened in the second quarter that just crossed the quarter, and they will be moving through in the third quarter.

So that caused just a temporary increase at period end in the second quarter.

So you should see the trading assets come back down to more normal levels in the third quarter.

Kevin, with respect to opportunities, I think in the broad categories you describe, I think there are opportunities in both.

I think in the very near term we are working aggressively in customer acquisition.

I think we're doing a good job there.

I'm encouraged by what I see our bankers accomplishing in winning new customer business, and I feel good about our opportunities there.

Longer term, and you pointed out, there have started to be early signs of consolidation in the industry.

I still think that the industry is going to go through a consolidation phase.

I think it's probably a multi-year phase, call it four- or five-year phase.

As I described in the prepared or the opening comments, I think we think that the environment is going to be a reasonably difficult operating environment, reasonably low growth in the economy, low interest rates, a lot of change from a regulatory perspective, need to get more capital into the industry.

All of that, in some sense, sets up for some amount if not a significant amount of consolidation in the industry.

And so we think there will be opportunities, whether they be FDIC assisted or a regular way.

We are going to be patient; we're going to try to be targeted; and we're going to try to put the capital to work in an effective long-term fashion where we can build out the operating model we have that I think has been so successful in building market share and producing returns in the state of Tennessee on a broader basis, in Tennessee and then in contiguous markets.

So yes, I think there will be opportunities for consolidation.

I'm just not sure at what point.

Okay, thanks, guys.

Sure thing.

Tony Davis with Stifel Nicolaus.

Just, I guess, because of the compression that you are seeing in C&I spreads, you have identified CRE asset-based lending as two areas that you would like to look at more aggressively going forward.

I'm just wondering if you have begun to make new commitments in CRE and where you are in terms of the asset-based portfolio today.

What's the size of the receivables or the staff or whatever you have in place?

Yes; both businesses, we are seeing opportunities in them.

The asset-based business has probably got -- I would characterize as more competitive in terms of the competitive dynamics around it.

You've got a lot of change, people getting in, people getting out of that business.

We are seeing opportunities to grow that.

Steve Hawkins and our team do a really good job of knowing their customers and building the business and building long-term relationships, and so we are seeing progress there.

Commercial real estate, as Greg commented earlier -- the deals, the opportunities that we are seeing in the pipeline are, I would say, very strong deals.

A lot of equity in these deals, very seasoned, very well-capitalized borrowers.

And that market is probably not as competitive as some others because of concentrations around the industry; it hasn't been as competitive.

So we think there are opportunities in both.

We think that, over the course of the remainder of 2010, we have the opportunity to close a fair number of deals.

Greg, I don't know what you want to add to that, if anything.

No; I think that's exactly right, Bryan.

The opportunities in the CRE world are very rifle shot, but they are extremely strong deals.

And I think it is partly, as Bryan said, just the competitive landscape.

And some competitors are just out of the business.

Secondly and on a different subject, I wonder if you could chat a bit about the response you are seeing to Reg E communications and your thinking here about the new checking product thoughts and how that might play out over the rest of the year.

I'll start, and then BJ can help me.

We've received responses from, in round numbers, about half our customers at this point.

We will see revenue related to Reg E decline over the second half of the year.

We've got about $40 million annually that would be subject to Reg E, in fees associated with ATM and point of sale, debit card, NSF/OD's.

We think the practical diminution of the revenue in the second half of that year is probably in the $10 million range, based on the response activity that we are seeing today.

Brad Gailey with KBW.

Thanks; it's Brady.

I wanted to ask you about TARP and if the $300 million of trust preferred coming out of Tier 1 changes your thoughts on repaying TARP, potentially, without having to raise.

I know BJ, a couple of months ago, was talking about potentially paying it off in pieces versus all at once, and I would be interested to hear the likelihood of that happening.

It's probably too early to know quite how to react to the phase-out of trust preferreds on our capital base and how that relates to CPP repayment.

And I'll summarize how we still think about CPP repayment.

As I've said before, and I think BJ has said before, we think it's a processes; it's a dialogue with our regulators.

We will have that dialogue with the regulators.

We feel good about our capital base, our regulators; and we will talk about what's the best way to repay it, how we repay it and the timing for repaying it.

And my hope still is that we can make significant progress in that regard during the course of 2010, essentially the second half of 2010.

Joe Stieven with Stieven Capital.

All my questions have been answered.

I actually thought I queued down.

So thank you, anyway.

Thank you.

Michael Rose with Raymond James.

Can you talk a little bit about some of the investments you've made in Nashville and how that market is coming along for you?

Yes; Michael, this is Bryan.

I'm encouraged by the signs we are seeing in Nashville.

Our team has got an awful lot of energy.

They are doing a really good job in calling on new and existing customers throughout the market.

We've hired a number of bankers over the course of the last 18 months in the marketplace.

Our retail organization is very, very focused and doing a very good job in terms of customer acquisition and bringing folks into the branches.

So we're starting to see the momentum in the balance sheet.

We are encouraged by the calling opportunities that we've had -- the folks that we've got calling on the Commercial side, Commercial and Corporate side.

And overall, very pleased with the traction that Doyle Rippee and his team have created over the last 18 months or so.

So are the pipelines -- has there been material growth in the pipelines there?

Yes.

It's sort of hard to adjust, but as I looked at the pipelines I was looking at earlier this week, I was very encouraged with the folks that we had opportunities to do business with in the marketplace.

So, yes, I think overall we are starting to see the improvement.

And part of that comes from the sizable increase in folks that we have in the C&I space that are calling and our emphasis on trying to put the right people and the right calling efforts in place.

Al Savastano with Macquarie.

First, on the mortgage warehouse, how big can you get there?

Do you have any limits on that portfolio?

And then I'll follow up after that.

This is Greg.

Yes; like any portfolio, we do look at limits on it just from a macro portfolio management standpoint.

So I think we might grow it slightly, but we are not going to grow it significantly more than where we are at right now.

There may be some names that we grow a little bit, but overall we are not going to grow that business, so it's a huge part of our balance sheet.

It's a very well-run business, and we have not had issues in that business, and we continue to be happy with it.

But it's just a matter of good portfolio management to not have it exceed certain limits.

Great; thank you.

And then just on the comment about the mortgage repurchases and the mortgage servicing, if we back our the hedging gains for the quarter, you had roughly high teens in net servicing income.

Does that mean you expect the mortgage repurchase provision to be down at that level?

Or, when you have your comments, are you expecting continued positive hedging gains in there?

I think what we are trying to say is that it's somewhat of an offset, meaning we obviously don't manage one side to match the other.

But what we are seeing is that we've gotten the MSR portfolio and the risk management structure around management of that to a point where we feel good about our ability to mitigate that risk, take some of the servicing income, take some of the carry from the MSR hedge assets and have some income that offsets mortgage repurchase expense, some of the mortgage repurchase expense ongoing every quarter.

So that's kind of how we are thinking about it.

Adam Barkstrom with Sterne, Agee.

Hey, a couple things.

How do we think about the tax rate going forward?

And just curious why there was a tax benefit this quarter.

Tax rate you should think about is 37% or something like that.

What we had in the quarter and what we normally have is $8 million or $9 million a quarter, roughly, of permanent tax credits.

Most of those are related to low income housing credits.

And so you are always going to have that level.

And when we are so close to breakeven profitability, those permanent tax credits are obviously going to make the effective tax rate look a little odd.

Got you.

And then one other question on the bank trust preferred portfolio.

Have you guys -- remind me, do you guys have that broken out anywhere geographically?

No, we don't break it out geographically.

It's concentrated primarily in the Southeast.

We do have a slide in our earnings presentation that gives some color on it; I think it's slide 15.

Slide 15 in the main deck that's up today?

Yes.

But that doesn't give you any kind of --

(multiple speakers) any geographic -- they're primarily in the Southeast, but it's a pretty national portfolio.

Okay.

Any sense I mean not that -- I'm sorry to press, but how much of that exposure is, perhaps, in Florida?

I can't --

Yes, there might be a couple (multiple speakers)

It's not concentrated --

It's not the --

It's not concentrated in Florida.

It's not the majority.

Adam, I'll follow up with you on it after -- I've got to look at a list, but we can't --

Okay, great.

All right.

All right, thank you.

Christopher Marinac from FIG Partners.

I just wanted to verify one thing.

On the OREO valuation adjustments, the small number that it is, that's embedded in the foreclosure expense that we see in the quarter; correct?

That's correct.

Yes.

And then just a general question about efficiency.

Do you think we will see efficiency gains in this quarter, BJ or Brian?

Or is that more going to be progress for 2011?

Yes; I think you'll see efficiency gains.

If you look in the core businesses, you will see that we had continued declines.

And I think, over time, as we work through our efficiency efforts you will continue to see that come out.

The volatility in our aggregate earnings -- I'm sorry, our expense base -- is really related to these environmental costs, predominantly the mortgage repurchase.

So we feel good about the efforts that our folks are making to make ourselves more efficient, and you should continue to see steady progress there.

Okay.

That's great.

I just wanted to clarify it.

Thanks very much.

Mac Hodgson with SunTrust Robinson.

Just one quick question; most of my questions have been asked and answered.

I didn't see a disclosure on TDRs.

I know, Greg, you mentioned the Company might start doing some A B note structures with commercial real estate.

Do you have any TDRs as of the end of the second quarter?

Yes; yes, we do.

We have about $177 million in TDRs, up slightly from the first quarter.

The majority of those in that portfolio are on the consumer side.

Part of the lift quarter over quarter was in the commercial side.

Typically, that would be -- for this quarter, those were relationship kind of transactions and in C&I and CRE income property, were the ones that, on the commercial side, that increased quarter over quarter.

Is that all nonaccruing TDRs?

Are there any accruing TDRs in there?

There are some.

I don't have off the top of my head; there is some accruing with that.

Would you say that the large majority is nonaccruing?

I'm just trying to -- if I want to adjust the nonperforming loan number, I just wanted to (multiple speakers) if I should add anything back (technical difficulty).

One second here, let me --.

Yes; I think, actually, it's about 60% or more accruing.

And that mix is consistent with the last quarter?

Yes.

In terms of the accruing, yes.

Okay, great.

Thanks.

Actually, it was about 50% last quarter.

So it's 60% -- about 60% now.

At this time, I'd like to turn the call over to Bryan for any closing remarks.

Thank you, operator.

We appreciate you joining us this morning.

I'm very pleased with the results of the quarter.

I'm pleased with the progress we've made in repositioning the business.

I think we are uniquely and very well positioned for what was likely to be a more challenging operating environment.

I appreciate the hard work of our bankers and our capital markets folks all across the organization.

They've done a great job in executing.

Thank you, all.

If you had any further questions, please let one of us or Aarti know.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.